Click here to read the eBook: Stand$-$Alone Risk

EXPECTED RETURNS

Stocks A and $B$ have the following probability distributions of expected future returns:

Probability

A

B

$0\mathrm{.}1$

$(9\%)$

$(39\%)$

$0\mathrm{.}2$

$6$

$0$

$0\mathrm{.}3$

$13$

$19$

$0\mathrm{.}2$

$20$

$28$

$0\mathrm{.}2$

$37$

$49$

a$.$ Calculate the expected rate of return, $r_B,$ for Stock $.)$ Do not round intermediate calculations. Round your answer to two decimal places. $\%$

b$.$ Calculate the standard deviation of expected returns, ${}_A,$ for Stock $.).$ Do not round intermediate calculations. Round your answer to two decimal places.

$\%$

c$.$ Now calculate the coefficient of variation for Stock B$.$ Round your answer to two decimal places.

d$.$ Is it possible that most investors might regard Stock $B$ as being less risky than Stock $A?$

I. If Stock $B$ is more highly correlated with the market than $A,$ then it might have a lower beta than Stock $A,$ and hence be less risky in a portfolio sense.

II$.$ If Stock $B$ is more highly correlated with the market than $A,$ then it might have the same beta as Stock $A,$ and hence be just as risky in a portfolio sense.

III. If Stock $B$ is less highly correlated with the market than $A,$ then it might have a lower beta than Stock $A,$ and hence be less risky in a portfolio sense.

IV$.$ If Stock $B$ is less highly correlated with the market than $A,$ then it might have a higher beta than Stock $A,$ and hence be more risky in a portfolio sense.

V$.$ If Stock B is more highly correlated with the market than $A,$ then it might have a higher beta than Stock $A,$ and hence be less risky in a portfolio sense.